Dow Divisor

Posted in Finance, Accounting and Economics Terms, Total Reads: 472

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Definition: Dow Divisor

Dow divisor is a number that is used to divide the sum of the prices of the thirty stocks that constitutes the Dow Jones Index. For the computation of Dow Jones Industrial Average, Dow divisor is being used. Hence, DJIA is basically a price weighted index that is obtained by dividing the total price of all the thirty stocks of Dow Jones index by a number called as Dow Divisor. This divisor is adjusted periodically in a way such that it takes into account the effect of stock splits, issue of bonuses or any change that is being done in the component stocks of the Dow Jones index.

This is done so that the value of the DJIA remains consistent. DJIA is also called as Dow 30 or the Industrial Average and many times only as ‘Dow’. As on 23rd March 2015, the value of Dow Jones divisor was 0.14985889030177. Since the value of Dow divisor is less than one it shows that the value of the Dow Jones index is more than the total price value of its component stocks. However, the value of the index is not adjusted in case of occurrence of normal events such as distribution of normal dividends.

DJIA= ∑ Price of all component stocks / Dow Divisor

Dow Jones index was first introduced in the year 1896 by Charles H. Dow, one of the founder members of the very famous The Wall Street Journal. It is one of the oldest, largest and influential financial news companies of the world. Initially, this index constituted of only 12 stocks. But in the year 1928, it was increased to the total of 30 stocks. It is one of the most famous stock indexes in the world. Its composite stocks include stocks of companies like Microsoft, IBM, Nike, Visa, Apple, Intel, McDonalds etc. These stocks are often called as “Blue Chip” stocks.

Hence, this concludes the definition of Dow Divisor along with its overview.

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